Finance

Federal Reserve Vice–Chairman Stanley Fischer’s speech at the 2015 U.S. Monetary Policy Forum in New York centered on the Fed’s asset purchase program and future policy normalization based on the rate of interest paid on excess reserves. But the optimism he expressed in his remarks may be unwarranted.

With more than one million jobs added in the past three months, the unemployment rate nearly one full percentage point lower than a year ago, and rising consumer confidence, the economy is clearly on the uptick. Yet there is a worrisome disconnect between Federal Reserve officials and financial markets about what needs to be done in the near future

An active -- and often colorful -- debate surrounds recent legislative proposals to “audit” the Federal Reserve. While participants on both sides of this debate have not always been careful to explain exactly what such an “audit” would entail, all of these proposals emphasize that the central bank requires closer monitoring.

The conventional wisdom holds that oil prices collapsed because of a positive supply shock. As technological innovation enabled energy companies to extract previously untapped shale oil and gas, producers were willing to supply more at any given price than they were before. That storyline has some glaring gaps. For example, domestic crude oil production has been steadily increasing for six years, practically doubling in that time period to a record 9.2 million barrels a day.

Mainstream monetary economics posits that the Federal Reserve influences economic activity by shaping expectations about the future. According to theory, when the Fed provides “forward guidance” about the future course of monetary policy, consumers and producers adjust their spending, hiring, and investment decisions accordingly. Forward guidance, in turn, can be communicated to the public via statements from Fed officials or public understanding of a policy rule that leads the Federal Open Market Committee to adjust its target for the federal funds rate.

President Obama’s administration, the Federal Reserve and independent economists have to answer the central question about this recovery: why did the enormous sustained monetary stimulus have so little effect on real output, employment and prices?

For an institution that prides itself on clear communication - an institution that elevated "forward guidance" to a policy tool - the Federal Reserve seems to be having trouble getting its message across. Either that, or the central bank's words are falling on deaf ears.

Some observers of the Fed were complaining Wednesday that the FOMC statement should have rolled back plans for a mid-2015 rate increase. In their view, reduced rates of inflation observed currently, along with the strong dollar and weak nominal wage growth, should lead the Fed to postpone any rate increases. Such concerns are dead wrong.

It appears that Alexis Tsipras’s Syriza party has won the Greek election, although as of Sunday night, it remains unclear whether he will need to form a coalition government or be able to control parliament on his own.

In September 2008, US policymakers were caught flatfooted by the Lehman bankruptcy as they grossly miscalculated the fallout from that event. Today, European policymakers would seem to be making a similar miscalculation in the context of the fast moving Greek developments. First, they seem to be excluding the possibility that Greece could be forced out of the Euro. Second, they seem to be minimizing the cost of a Greek exit to the rest of the European economy were that to occur.